MasTec, Inc. — Q1 2016 Form 10-Q
Business context and period. MasTec provides infrastructure engineering, construction, installation and maintenance, mainly across North America. This unaudited report covers the three months ended March 31, 2016; comparisons are with Q1 2015. Results are seasonal, and first-quarter performance is not necessarily indicative of full-year results.
Financial performance
Amounts below are in millions of dollars, except per-share amounts and percentages.
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $974.2 | $1,003.3 |
| Operating costs, excluding depreciation and amortization | $884.4 | $886.4 |
| Depreciation and amortization | $39.0 | $42.6 |
| General and administrative expenses | $60.0 | $74.0 |
| Interest expense, net | $12.2 | $11.0 |
| Loss before taxes | $(5.0) | $(10.7) |
| Income tax benefit | $2.1 | $4.4 |
| Net loss attributable to MasTec | $(2.7) | $(6.3) |
| Diluted loss per share | $(0.03) | $(0.08) |
| EBITDA (non-GAAP) | $46.2; 4.7% margin | $42.8; 4.3% margin |
| Adjusted EBITDA (non-GAAP) | $53.8; 5.5% margin | $63.8; 6.4% margin |
| Operating cash flow | $15.9 | $118.8 |
Costs of revenue excluding depreciation rose to 90.8% of sales from 88.4%, pressuring project profitability. Adjusted EBITDA and adjusted net income exclude specified items and are non-GAAP measures; the company cautions they are not substitutes for GAAP results or cash flow.
Segments
| Segment | Revenue, Q1 2016 vs. Q1 2015 | EBITDA, Q1 2016 vs. Q1 2015 |
|---|---|---|
| Communications | $511.6 vs. $469.9 | $61.7 vs. $51.7 |
| Oil and Gas | $292.7 vs. $326.8 | $16.2 vs. $21.5 |
| Electrical Transmission | $86.3 vs. $116.0 | $(23.8) vs. $(2.5) |
| Power Generation and Industrial | $81.4 vs. $84.3 | $2.9 vs. $(8.9) |
| Other | $3.4 vs. $6.6 | $0.2 vs. $(5.1) |
Balance sheet, cash flow and liquidity
- At March 31, 2016, cash was $3.9 million; current assets were $1,198.5 million and current liabilities $811.7 million. Working capital was approximately $387 million.
- Total debt was $1,024.8 million, including $400 million of 4.875% senior notes due 2023. Long-term debt was $938.7 million. The company reported compliance with debt covenants.
- Credit-facility revolving loans were $230.9 million and term-loan balance was approximately $247 million. Letters of credit outstanding were $403.8 million; reported availability was $365.3 million for revolving loans, or up to $46.2 million for new letters of credit.
- Operating cash flow fell to $15.9 million from $118.8 million, mainly reflecting working-capital movements. Receivables rose to $970.9 million from $911.1 million; net DSO was 74 days, versus 68 at year-end 2015 and 88 a year earlier.
- Investing cash outflow was $12.6 million, including $13.3 million of capital expenditures. Financing cash outflow was $3.6 million. Cash declined by $1.1 million during the quarter.
Material changes and management commentary
- Revenue declined 3% year over year. Communications grew 9%, driven mainly by higher install-to-the-home and satellite installation volumes. Oil and Gas fell 10%, chiefly due to lower Canadian activity amid weak oil prices; Electrical Transmission fell 26%, reflecting project delays and fewer successful awards.
- Electrical Transmission recorded a $15.1 million project loss; the project was about 85% complete at quarter-end. Oil and Gas recorded a $13.5 million loss on a western Canadian project. The company also recorded approximately $4.1 million of restructuring charges across these operations.
- GAAP net loss improved, in part due to lower G&A and $13.4 million of other income, including approximately $10 million from a settlement related to a previously acquired business and approximately $2 million from earn-out estimate changes. Q1 2016 also included $3.6 million of earnings from increased expected recoveries on investments in liquidation.
- Backlog for the next 18 months was $5.67 billion at March 31, essentially unchanged from year-end 2015 and up from $4.21 billion a year earlier. Management expected to realize approximately 70% of March backlog during 2016. Backlog includes cancellable master-service work and is not a guarantee of future revenue.
- Management expected cash from operations, facility availability and cash balances to fund needs for at least 12 months. Estimated 2016 capital expenditures were $80–$90 million, or $70–$80 million net of disposals; equipment purchases under lease or other financing arrangements were expected to be another $70–$80 million.
- Management identified only about 4% estimated fair-value headroom over carrying value for the Electrical Transmission reporting unit; lower profitability or cash flows could lead to a future non-cash goodwill impairment.
Risks, contingencies and unusual items
- Customer concentration is significant: AT&T represented 39% of Q1 revenue and Energy Transfer affiliates 18%; the top ten customers generated 73%. Many master-service agreements can be canceled on short or no notice.
- The company disclosed a shareholder securities class action relating to accounting matters addressed in the Audit Committee investigation. MasTec said it believes the lawsuit is without merit and is defending it. The SEC had commenced a formal civil investigation relating to prior-period financial-statement adjustments and the investigation; the company said it would continue cooperating.
- Letters of credit, performance and payment bonds, self-insurance, multiemployer pension plans, joint-venture guarantees and other indemnities create potential obligations. The company reported $403.8 million of facility letters of credit outstanding and $147.8 million of performance and payment bonds for projects in process.
- MasTec’s 35% interest in the Canadian contractual joint venture includes joint-and-several obligations. Related performance guarantees were approximately $101.6 million at March 31, based on the full contract value, rather than solely the company’s ownership share.
- Q1 included $8.0 million net-of-tax unrealized losses on interest-rate swaps held by the Waha joint ventures, recorded in other comprehensive loss. The company’s proportionate share of swap losses was approximately $13.0 million before tax.
- The Board authorized a $100 million share-repurchase program in February; no shares were repurchased under the public program in Q1. A small number of shares were repurchased through employee-program elections.
Most important facts for investors to verify
- Whether the Electrical Transmission loss-making project is completed without further cost overruns, and whether the segment recovers from its weak results.
- Whether cash conversion improves from the sharp year-over-year decline in operating cash flow, including collection of receivables and management of DSO.
- Whether backlog converts to revenue on schedule, particularly cancellable master-service work and projects exposed to customer delays or energy-market conditions.
- Progress and potential financial consequences of the SEC investigation and shareholder litigation, including any developments concerning prior-period accounting.
- Customer concentration, credit-facility and letter-of-credit capacity, debt covenant compliance, and potential impairment risk given the limited Electrical Transmission goodwill headroom.